Tag Archives: PwC

“Rigging the system to fix their bonuses. The word “corruption” is not enough to describe what they were doing.”

So stated one expert observer on Radio 4’s Today programme this morning (November 12, 2014) about the Foreign Exchange corruption in the world’s banking systems. UBS, RBS, Citibank, JP Morgan and HSBC were fined $3.4bn and Barclays is still to settle.

The travails at Tesco on which I have recently written, appear almost trivial beside the corruption (and, yes, “corruption” is the word to describe what was happening) that pervaded the western world’s banking systems leading up to and well beyond 2007.

The Bank of England apparently feels exonerated by the fact that no-one there knew anything about the foreign exchange mis-dealings at the five (or six) banks now fined. Just like the protestations at Tesco’s auditors (PwC) who, after 30 years, knew nothing about the culture changes that were at the root cause of Tesco’s recent failings.

Culture is the root of corruption

Francis Fukuyama in his excellent books “Political Order and Political Decay” and “The Origins of Political Order” showed how culture is at the root of society at the national level.

This is as true of companies – complex adaptive systems if ever there were any – as of nations. Companies are directed entities and depend on senior management and Boards allied to the competitive and regulatory environment in which they exist for the culture that they employ. The culture of every business is different – depending on the specific people they employ, the rules they employ, the country and region they exist in and the external environment.

The culture of any business organization is not a secret to those working within in it and is not a secret to those who work closely with it.

When a culture goes bad, as it clearly did in the case of Tesco and on a much broader and deeper scale in the case of the banks, it is not sudden and evolves as a result of changes that are both internal and external. Culture change has been the topic of many books and papers since well before the advent of quality management and Deming but these books tend to dwell on how to improve the culture to one of quality control or of “excellence” (as in Tom Peters’ “7 S’s”).

Unfortunately, there is little literature on how to understand corrupting business cultures in order to make changes that impact early enough so that customers, the business and shareholders are not hurt. The issue with banks is that nations have been hurt as a result of the toxic atmosphere in these institutions and the noxious emissions that resulted.

This cultural health and safety aspect of banking is clearly not understood by regulators (nor, indeed, by Directors and Audit Committees let alone external audit firms). Regulations are all about legal change and regulators are, to a large extent, ticking and checking against a set of procedures in the same way that external auditors carry out their roles.

The prime aim of such regulators seems to be to do a job so that they cannot be blamed for any failures. The Bank of England – crucial to the proper oversight of our financial systems – has failed so often in the past ten years but now seems comforted that no-one inside the BoE knew what was going on. RBS’s own (relatively) new CEO (Ross McEwan) voiced his anger on the BBC at the actions of “a very small group” of foreign exchange traders ruining everything for the many good people that work for RBS. He was asked the right question by the BBC interviewer (Kamal Ahmed) – “is culture changing enough”? McEwan responded that it was not changing quickly enough. But, the bad culture became institutionalised (as Ian Fraser’s excellent “Shredded” showed) and the thought that senior management did not know of such a culture existing within such a key area of the bank is too sad to be true.

Walk into any office of any organization and any seasoned business manager will detect the culture. Ask some questions and listen to the responses. Any organisation is based on how its culture works and who benefits from that cultural response to its aims and ambitions.

Short-termism, where bonuses are made through short-term risk-taking and often corrupt dealing, is bred in cultures that are knowable. For management to claim not to be aware is ludicrous. As many senior bankers said around 2008/9, they knew the culture was wrong but could not stop it as everyone (every bank) was the same – no-one was willing to stop.

Fukuyama describes well how corrupt societies work where lack of trust exists around the centre (e.g. government) and where corruption is rife. No-one is wiling to be the first to pay their proper taxes, for example, if no-one else does. The same was true with the banks – everyone was corrupt, so who was going to stop the game? No-one. Now, no-one trusts the Banks – supposedly, a central plank on which wider society floats.

With the foreign exchange corruption, which occurred much more recently, there seems to be little or no excuse. The banks have been going through huge structural re-assessments since they sank in 2008 and senior management were being changed along with it. The Bank of England should have been focused on critical market areas (Foreign exchange transactions in London – 40% of the world’s transactions take place here – are hardly trivial) and should not have been unaware of the overhang of a corrupt culture in UK banks. To claim otherwise is nonsense.

The culture within regulators has to be changed along with the banks. While no-one claims they are corrupt cultures, a culture of defensiveness, box-ticking, shifting blame and lack of knowledge is the worst cultural set for a regulator. They need (like external auditors) to be responsive to societal needs – not tick and check but pro-actively understanding the organisations they are supposed to be regulating (or auditing). This is not an easy task for organisations that appear to be completely incapable of doing this important job – not wanting to rock the boat before it sinks. But, rocking the boat may throw out those who are bent on sinking it before it sinks – that is what good regulation (or auditing) is all about.

Corrupt cultures in any organization or city or country don’t happen by chance. Tesco is a microcosm of the real world where activities are engineered by those in authority to create an atmosphere of pressure – maybe extreme pressure.

Listening to Melvyn Bragg’s “In Our Time” on Radio 4 today about the Haitian Revolution, it is easy to be complacent about how much we have changed. Slavery in Haiti was extreme – 90% of the population enslaved and under conditions that we in the West would rightly be scandalized about. Yet, we see similar conditions in many parts of the world today – countries like Equatorial Guinea where Transparency International is working to alert the world to tremendous poverty and lack of rights that are accorded to its people because the elite there takes virtually all the revenue from oil resources. Showing why “per capita GDP” data is, on its own so misguided in a world which is moving towards more income inequality, Equatorial Guinea has a per capita GDP on a par with Italy – yet most citizens lack access to clean drinking water.

The extraordinary problems that Equatorial Guinea has (caused by extreme corruption) may make any comparison with the UK seem a step too far. Surely the issues raised by the mis-accounting at Tesco is not even similar to what happens in Equatorial Guinea, Angola or other nations where vast resources are corruptly taken by a few.

However, that argument is much like someone arguing that, because of wars in Iraq and Syria, we should be content and not concern ourselves with knife-crime in the UK or poor waiting times in the NHS.

Corruption is corruption and what we are witnessing at Tesco has been the corrupt mis-accounting of £263 million and the humbling of a once-great business.

Deck Chairs on the Titanic?

Almost understandably, writers on Tesco and the company itself portray the problem as a few people that were under severe pressure and made bad decisions to bring forward hoped-for future profits into earlier periods. The Chairman is now leaving and various senior staff remain sidelined.

The auditors, Price Waterhouse Coopers (PwC) claim to have been “misled” by senior staff that were carrying out the mis-accounting. No-one seems surprised that they missed £263 million amongst the billions that are moved into and out of Tesco.

Accounting is but a reflection of a business. It is notoriously hard to find major errors which management are trying hard to hide. Most accounting crimes are found via whistle-blowers (as in this case and cases like Enron – which led to the demise of one of the big accounting firms – Arthur Andersen – who were complicit and went out of business as a result). This is not to say that PwC are in any way complicit. The issue is that audit firms are not that good at finding fault and (after 30 years as Tesco’s auditors, with ex-PwC members of the Tesco Board and being paid £10m a year) there are always suggestions that audit firms don’t try too hard.

The Board seems to have been in complete denial of the issues. Not only did they not know that the accounting problems existed until the whistle blower blowed, but they did not “see” the culture that led to the problems. Non-executive Directors on the audit committee, for example, are usually transfixed by numbers – and usually fail to ask the hard questions.

How many companies operating from the UK into nations where bribery and corruption is the norm ask the hard questions in Board and less formal meetings even now that the Bribery Act (and before it the Foreign Corrupt Practices Act in the USA) has been in place for 4 years. Glaxo (GSK) is feeling the pressure now about how it did business in China – a country where corruption is / was the norm and GSK went with the flow for many years. Here, staff were under pressure to perform but did so with the help of corruption.

The numbers could have indicated the problem but the culture certainly would have. Yet, how many Boards understand the culture of the organization for which they serve and can connect the culture with the potential for corruption or even associate the two?

Business Culture is key to success – and failure

When the banks entered into their maniacal dance of death resulting in the financial crash of 2007 and thereafter (which we are still paying for – literally), it was their common casino and bonus culture that was to blame. Senior management encouraged their investment banks and those outside the traditional banking rigours to take larger and larger risks but also to defraud customers. Ian Fraser’s excellent “Shredded” about RBS (Royal Bank of Scotland) is an example of how individuals create the culture of a bank or any organization and then reap the whirlwind that follows – whether good or bad.

The worst business cultures see staff swept along like leaves. As a character in my own book “Last Line of Defense” said”

“A business can take on an independent existence of its own. It begins to direct the individuals within it, rather than the other way. There is a dynamic to a business which can make you feel like a leaf in a river, unable to change the river’s course. Eventually unable to change its own course, the leaf is swept away downstream. The river carries on as before.”

So, it happened in Tesco. The CEO demanded results and got them – trouble was, they were not real. Instead of Tesco being a great company with great products and services that its customers wanted, it relied on mis-accounting to boost results.

That is a corrupting culture. It corrupted staff to engage in non-value added activities that prejudiced the company’s future and were a direct result of the pressures of a business that was failing to differentiate itself through its proper business activities.

Some argue that no-one benefitted from this. Maybe true if all the culprits are shown to be culpable and pay back any bonuses and pensions gleaned from the additional profits and maybe pay for the corruption with their jobs. Saving a job and its not unreasonable salary through corrupting the numbers has resulted (arguably) in a threat to Tesco’s future that a focus on how to make Tesco a better business would not have done. Just like the bureaucracy in Terry Gilliam’s “Brazil” that took up all a country’s resources and added no value, so a corrupt culture spends far too much time “corrupting” and not enough adding real value. So, a business collapses from the inside unless the corruption is arrested.

This is true of any corrupt organization – business or city or nation – where corruption exists and exacerbates the already bad conditions in which those who are party to the corruption or affected by it have to endure.

Fine, Tesco is not Equatorial Guinea but it is in the same game when, as a respected multinational business, it engages in bad business practices – corrupt practices.

Learning the Lessons?

Tesco seems not yet to have learned these lessons or at least not admitted to them. Accounting issues, changing board members, adding new processes and the like are all outputs of decisions to change culture. Why doesn’t Tesco actively state that this is what is has to do and then establish how best to do it. If it does not, then the changes will not result in real change but be like those deckchairs on the Titanic?